CalSTRS Decides on New Asset Allocation Mix
Investment Committee diversifies the portfolio by shifting allocation targets from global equity to inflation-linked assets.

News release Ricardo Duran

WEST SACRAMENTO, CA. – The California State Teachers’ Retirement System (CalSTRS) Investment Committee today voted to make a subtle shift in the long-term asset allocation targets of its $170 billion investment portfolio. The decision caps an exhaustive year-long asset and liability study, which examined the risk and return profiles affecting the investment portfolio.

“These are studies we conduct every three years and this was a critically important one, examining the effectiveness of our response to the global financial crisis of 2008-09,” said CalSTRS Investment Committee Vice Chair Sharon Hendricks. “This study was invaluable in familiarizing our board members with the elements and dynamics of our portfolio. Our examination of the market allows us to adapt and to coax consistent long-term growth from a chaotic environment.”

The new asset allocation reduces the largest asset classes, such as Global Equity, from 53 to 51 percent and Fixed Income from 20 to 16 percent. The illiquid asset classes, consisting of Real Estate and Private Equity, saw their allocation edge upward by 1 percent respectively.

Asset Class Current Targets New Long-Term Targets
Global Equity 53.0% 51.0%
Fixed Income 20.0% 16.0%
Real Estate 12.0% 13.0%
Private Equity 12.0% 13.0%
Cash 1.0% 1.0%
Inflation Sensitive 2.0% 6.0%
Absolute Return (formerly Overlay) 0.0% 0.0%

The Investment Committee set a long-term target of 6 percent for the Inflation Sensitive asset class but will not chase that target. It directed staff to instead allocate opportunistically. While inflation is very low today, the CalSTRS Investment Committee wants to build in protection for the future. At present, CalSTRS staff will continue to make infrastructure investments. They will incubate a small allocation to commodity managers and over time, as opportunities arise, will expand the inflation-linked portfolio.

“Strategic asset allocation is the single most important factor in determining the overall rate of return for investments over the long term,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “By adopting this long-term asset mix, the committee reaffirms the plans we established after the financial crisis of 2008. To date, our performance–in the top 14th percentile over three years–demonstrates it’s been a good approach.”

Full plans for implementing the new asset allocation will be developed in the coming months and will take at least another three years to execute.

The Investment Committee members used computer models that took into account assumptions such as:

  • The fluctuation of returns over time, risks and correlations among asset classes.
  • The overall trending of inflation over time.
  • The need to meet a long-term investment return rate of at least 7.5 percent.
  • Contribution rates that are capped as a percentage of payroll under Senate Continuing Resolution 105’s Scenario 1.
  • An active and retiree membership closely tracking baby boomer demographic trends.

The California State Teachers’ Retirement System is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. For 100 years, CalSTRS has served California’s public school educators and their families, who today number 862,000 from the state’s 1,600 school districts, county offices of education and community college districts.